Bank Reconciliation Made EasyBank reconciliations are prepared by bank depositors when they receive their monthly bank statements.  The reconciliation is made to determine any required adjustments to the cash balance.  Two types of reconciling items are possible: (1) Reconciling items not requiring adjustment on the books (type A) (b) Reconciling items requiring adjustment on the books (type B). And, two format of bank reconciliations is demonstrated in this post. Read on… 

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Types of Reconciling Items in Bank Reconciliation

Type A: Reconciling Items do not require adjusting Journal entries

(1) Outstanding checks
(2)  Deposits in transit
(3) Bank errors

Type B: Reconciling items require adjusting journal entries

(1)  Unrecorded returned nonsufficient funds (NSF) checks
(2)  Unrecorded bank charges
(3)  Errors in the cash account
(4)  Unrecorded bank collections of notes receivable

 

Reconciling items must be analyzed to determine whether they are included in:

  • the balance per bank; and/or
  • the balance per books.

 

If they are included in one, but not the other, an adjustment is requiredFor instant: the $1,800 deposit in transit in the following example is included in the balance per books but not in the balance per bank.  Thus, it must be added to the balance per bank to reconcile to the correct cash balance.  Deposits in transit do not require an adjusting journal entry.  Analyze all reconciling items in this manner, but remember, only journalize type B reconciling items

Note: Type A and B adjustments can be either added or subtracted depending upon the type of format and the nature of the item.

 

Formats and Examples of Bank Reconciliation

Two types of formats are used in bank reconciliations:
 
Format 1

Balance   per        bank 
+/–        A adjustments 
Correct  cash  balance 

Balance    per     books 
+/–        B adjustments 
Correct  cash  balance

 

 Example of Bank Reconciliation Format 1 is shown below:

Sample of Bank Reconciliation Format 1

 

Note: he balance per bank and balance per books each are reconciled directly to the corrected balance.

Adjusting journal entries: All of the items in the per books section of a bank reconciliation (type B) require adjusting entries.  The entries for the above example appear below:

[Debit]. Miscellaneous expense = $5 
[Credit]. Cash = $5

[Debit]. AR = $170
[Credit]. Cash = $170

[Debit]. Cash = $150
[Credit]. Notes receivable = $150

[Debit]. Cash = $45
[Credit]. AR (or sales) = $45

 

Format 2 [Four Column Cash Reconciliation, referred to as “Proof of Cash”]

Basically, format 2 is as follows:

Balance per bank
+(–) A     adjustments
+(–) B     adjustments
Balance per books
+(–) B     adjustments
Correct cash balance

 

Example of Bank Reconciliation Format 2 [Four Column] is shown below:

Example of Bank Reconciliation 4 Column

 

Unlike the bank reconciliation format 1 above which is as of a specific date, a four-column cash reconciliation, also known as a “proof of cash,” reconciles bank and book cash balances over a specified time period

A proof of cash consists of four columns:  beginning of the period bank reconciliation, receipts, disbursements, and end-of-the-period bank reconciliation.  Thus, the proof of cash cross-foots as well as foots.

Note that there are no type B reconciling items in the beginning reconciliation column.  This is because the $4,562 has been adjusted when the June bank statement was reconciled.  Notice that figures appearing in the center columns have unlike signs if they are adjacent and like signs if they are not adjacent to amounts in the side columns.

The purpose of the proof of cash is to disclose any cash misstatements, such as unrecorded disbursements and receipts within a month, which would not be detected by a bank reconciliation. For example, if the center two columns each required a negative $1,000 to make the top line reconcile with the bottom line, there may be unrecorded receipts and deposits of $1,000.